McDonnell on the big tests for the Budget and how to tackle tax avoidance

John McDonnell MP, Labour’s Shadow Chancellor, speaking in an Opposition Day Debate in the House of Commons on tax avoidance and evasion, said:

With a Budget in just over a fortnight, over the coming days we will be setting out an agenda of issues that the Government needs to address to tackle the social and climate emergencies our country now faces. 

And yes, there is a social emergency in many of our communities.

Yesterday my Rt Honourable Friend the Shadow Health Secretary exposed the appalling levels of health inequality across the regions of our country. 

Today the Marmot report showed the shocking result of 10 years of austerity.  Life expectancy has stalled for the first time in more than 100 years and has even reversed for the most deprived in our community. 

Yesterday, my Rt Honourable Friend the Shadow Secretary of State for communities and Local Government revealed the scandalous impact cuts to local councils have had on the services desperately needed to keep our children safe.   

This afternoon my Rt Honourable Friend the Shadow Minister for Mental Health and Social Care will describe the immense suffering and distress caused by the cuts in social care imposed by this government: 87 people dying each day before they can receive the care they need.

At present we have a government that has proved to be incapable of caring for our people, housing our people, feeding them or providing the work that will lift them and their families out of poverty.

There is a lot of hyped up talk about big expenditure numbers associated with this coming budget. What we are interested in is outcomes and the impact on the wellbeing of our people.

These will be the key tests of the forthcoming Budget. Will it really end and reverse the decade of austerity cuts imposed upon our community by the Tories? Will it ensure that our people are properly cared for, housed, fed and lifted out of poverty?

And yes, of course alongside all this, in a week where we have again seen the Prime Minister’s failure to respond to flooding that has damaged so many of our people’s lives, the overriding test is: will this Budget tackle the existential threat of climate change?

Contrary to virtually all the advice from mainstream economists 10 years ago the newly elected Conservative government took the political decision to impose austerity cuts on our community.

As we have repeatedly said it was a political choice not an economic necessity. 

The alternative was to ensure that we had a fair taxation system to fund our social infrastructure and that we borrowed to invest in our physical infrastructure to grow our way out of recession.

The reality was that the Tory neoliberal ideologues simply couldn’t let the economic crisis go to waste. They seized the opportunity to launch their experiment to downsize the role of the state through cuts, outsourcing and privatisation.

This was linked to ever more restrictions to reduce the effectiveness of trade unions to represent their members.

To shift the balance of power between capital and labour in the workplace.

The result has been virtually every area of our public services in crisis, the slowest growth in wages in 200 years, 8 million of our people in working households living in poverty, over 4 million of our children in poverty, a UN rapporteur describing levels of destitution in our country and the treatment of disabled people as an abuse of their human rights.

The government’s alibi for austerity was the global financial crisis, even though government spending was never a cause of that crash. Now, 12 years on, they no longer have that fake alibi for their cuts.

It’s clear the Tories don’t just want to shrink public services and cut public sector jobs in the short-term. They want to downsize our public services for good, baking austerity in to government.

All this suffering, all this hardship, all this holding back of a near generation of potential would have been rendered completely unnecessary if we had a fair taxation system and invested in our economy.

A fair taxation system starts with ensuring that people and corporations pay their taxes. 

That patently is not the case at the moment. There is much talk about levelling up. Let’s start with levelling up the rules of taxation and the amount many of the rich and corporations pay in their taxes.

HMRC says the UK tax gap is about £35 billion. That’s the difference between HMRC’s estimate of the tax that should be paid and what is paid.  But that doesn’t include many of the abuses of corporate profit shifting. HMRC itself acknowledges “many sources of uncertainty and potential error”.

Other experts have suggested the tax gap could be as high at £90 billion.

So let’s look at who we know is not paying their taxes. It’s the rich. It’s corporations. And in particular it’s multinationals.

Successive Conservative governments have been weak on multinationals.

According to analysis by Tax Watch UK, the top five tech companies alone avoided around £5 billion in UK tax in the last five years.

That is enough to reverse the cuts to homelessness services, or to provide support for families to prevent children being taken into care.

Recent years have seen secret sweetheart deals between HMRC and the tech giants, only made public after the tireless work of tax justice campaigners.

The Government trumpeted its Digital Services Tax before the election. But that tax has been widely criticised. It is aimed only at digitalised business models. It is impractical and hard to administer. It creates a pitiful 2% tax on the revenues of a small group of businesses, and would raise a tiny £5 million this coming year if it is brought into force on 1 April.

And now there is talk that the Government will drop even that hollow half-measure.

Let me be clear. If the Government drops or delays that Digital Services Tax that will be yet another tax giveaway to these powerful multinationals.

Non-dom status is another tax giveaway that the Tories have failed to clamp down on.

A colonial hangover from 1799 that allowed colonists to shelter their property from tax. A carve-out to the general rule that UK tax residents pay tax on income wherever it is earned. A carve-out that applies only to some who might have their ‘domicile’ outside the UK. Tinkered with by George Osborne, so that an annual charge of £30,000 is paid by some non-doms, and £60,000 by others. 

The Government will claim it’s abolishing non-dom status but it’s being kept intact for a number of years, despite evidence that those who use this status are the wealthiest individuals.

But the carve-out has largely kept intact, despite emerging evidence that those who use the status are the very wealthiest of individuals.

Previous estimates have said fully abolishing the status could raise up to £1 billion for our public services.

Non-dom status is just part of an array of ingredients that enable abuse of our tax system.

At the core of tax abuse is financial secrecy, especially the exploitation of Overseas Territories and Crown Dependencies to avoid tax.

Last week the Tax Justice Network judged that the UK had increased its secrecy score by more than any other country since it last measured financial secrecy. The Network said that the UK was backsliding in recent years by building its “spider’s web” of satellite tax havens.

The Panama Papers revealed that the most popular tax haven in the world is the Virgin Islands, a British Overseas Territory.

There’s been a history of failure to clamp down on enablers of avoidance and evasion – including auditors and lawyers. One recent paper said: 

“the tax services industry, propagated by the Big Four [accountants], is essentially the apex of this pyramid of factors that helps build, manage and maintain” tax havens.

But the Government has said or done little to crack down on the tax services industry.

aThere’s also been a history of failure to recognise how the City of London is complicit in financial misconduct affecting the Global South. 

According to Oxfam, the Global South is losing £170 billion in tax revenue due to the wealth of individuals and corporations hidden in tax havens.

Surely it’s our responsibility to ensure that London is not used as a global laundromat for washing dirty money, and it’s the government’s duty to protect our citizens by stopping that dirty money from undermining the rule of law and international stability.

To collect the taxes you need tax collectors. And yet HMRC has seen its staff numbers plummet from 105,000 in 2006 to 65,000 in 2019.

And there’s the litany of legal loopholes that the Tories have not acted on or have actively created. 

From the toothless General Anti-Abuse Rule – far weaker than anti avoidance rules in other legislations – to the use of legal professional privilege in tax avoidance.

George Osborne promised “the march of the makers”.

As Nicholas Shaxson has said - the Tories have only created “the march of the takers”

Working with the range of tax experts, accountants, PCS - the HMRC staff’s union – the tax justice campaigns and corporate reform groups, Labour has developed a proper plan to tackle each of these issues.

We believe, as others have said, that we need stronger public registers of trusts and beneficial ownership of companies, to put an end to financial secrecy.

Because the current register of trusts, so often a vehicle of tax avoidance, isn’t truly public. 

And the penalties for non-compliance are pathetic.

Because the current register of who controls companies is not being verified properly and has a high threshold for disclosure.

We have a plan for working with Overseas Territories and Crown Dependencies to accelerate moves towards tax transparency.

It’s not good enough that the deadline for establishing public registers of company control has slipped to 2023 at the earliest.

A plan to clamp down on enablers, by introducing stronger laws on facilitating tax evasion and harsher penalties for promoters of schemes. 

Because the current law has a wide defence for those accused of facilitating tax evasion and penalties for promoters of tax avoidance and evasion are far too weak.

A plan to introduce an Overseas Loan Transparency Register that would tackle injustices of the kind that we have seen in Mozambique: secret lending, using UK law, ripped billions from the budget of Mozambique. Then, when the effects of climate change were felt through flooding following a major cyclone, Mozambique was deprived of the resources it needed to protect its own people.

A plan to increase targeted audits done by HMRC to raise nearly £3 billion owed by self-assessment taxpayers. Because the majority of the self-assessment tax gap is owed by a small number of self-assessment taxpayers, who could be effectively targeted.

Our concern is that far from moving forward on tackling tax avoidance in this coming Budget, the Government is opening up the opportunity for more abuse with its proposals for Free Ports.

The evidence suggests free ports simply relocate jobs and investment rather than creating new jobs and investment. And they have far too often become hubs for abuse of workers’ rights and tax evasion.

For many it is clear why the Tories will not tackle tax avoidance and evasion.

The assertion is that they are in the pocket of the City. In the pocket of the avoiders, the evaders, and the enablers. 

It’s hardly surprising that some have come to this conclusion when just this month we learned that Lycamobile, which donated £2.1 million to the Conservatives, is embroiled in three tax disputes with HMRC over £60 million in unpaid tax. Indeed, the government blocked French auditors from accessing their records.

But the problem may also lie closer to home. Not just with donors. With the Chancellor himself.

There are questions that deserve answers about the new chancellor’s attitude to tax avoidance, given his past associations. 

I have written to the Chancellor with a series of questions on this matter.  In recent weeks it’s become clear that the Right Honourable Member for Richmond has had close associations with tax avoiders and tax havens.

If people are expected to have any confidence in this Government’s commitment to tackling tax avoidance, it’s critical that the Chancellor is fully open about his own past activities.

A former close business associate within two companies in which the Chancellor held senior positions, was ordered to repay £8 million after engaging in an unlawful tax avoidance scheme.

Two of the firms in which he held senior positions have made use of the notorious tax haven Cayman Islands.

On our side we will continue to press the case for a fair taxation system.

To do this, first of al, we need to close the loopholes that allow tax avoidance and evasion to flourish. But we also need to deal with the overall regulatory architecture of finance - a challenge raised by a report published this morning by the True & Fair Campaign.

Let me quote, Mr Speaker, from that report:

“… the last four years have seen a multiple pile-up of mis-selling scandals and incidents of regulatory failure.  It has witnessed the repeated and wanton abdication of responsibility by leading market participants … Worst of all, it has demonstrated a breathtaking betrayal of the trust … rightly owed by so-called financial services professionals to their investors and employees.”

That report is called Asleep at the Wheel, and singles out for criticism the Financial Conduct Authority, and in particular Andrew Bailey, the next Bank of England Governor.

On several occasions I have urged the previous Chancellor to delay the installation in office of Mr Bailey until there has been an independent review of his role at the FCA. This report adds urgency to that recommendation. 

I urge the new Chancellor to act on this now. 

The forthcoming Budget will be a test of whether the Tory Party has turned a page. 

From the evidence so far it is looking like more Johnsonian bluster.

Nothing on the scale needed to address in any serious way the damage Conservative governments over the last decade have inflicted on our community. 

And certainly nothing on the scale needed to tackle the climate crisis or any realistic policy to end and reverse austerity and invest for the future needs at its base a fair taxation system.

We await to see therefore whether in this budget the Government will at long last confront effectively the scandal of tax avoidance and evasion.

All I can say is judging on past form I am not holding my breath.